Equity analysts tracking telecom companies, including Reliance Jio, Airtel and Idea Cellular, say the ongoing price war has made it impossible to fairly value firms

Reliance Jio is also rolling out 4G data at aggressive prices, undercutting competition in a bid to attract a larger subscriber base. Photo: Aniruddha Chowdhury/Mint

Mumbai: Less than a week after Mukesh Ambani’s Reliance Jio Infocomm Ltd launched a Rs49 monthly pack for existing subscribers, equity analysts tracking telecom companies say the ensuing price wars have made it impossible to fairly value firms in their coverage.

In a note dated 25 January, Kotak Institutional Equities said Jio’s “relentless aggression” has left analysts with no fair basis on which to value stocks of telecom operators including Bharti Airtel Ltd – India’s largest telecom firm – and Idea Cellular Ltd – which is merging with rival Vodafone Plc.’s India arm. Kotak has dropped its rating on the Airtel stock.

“At the core of all of the above is the biggest qualitative aspect we have no way of forming a view on, anymore – what does Jio want?,” Kotak said in the note. “Even as the company’s actions thus far are suggestive of a drive to domination and willingness to be as aggressive as it takes to get there, our challenge is to figure out what level of domination Jio is seeking to achieve. All of this makes Bharti’s fair valuation a more-than-tricky exercise,” it said.

Kotak has revised revenue estimates for Bharti Airtel Ltd and Bharti Infratel Ltd, the telecom tower arm of the operator, predicting a drop in revenues of both firms between FY18 and FY19 year on year.

This comes at a time when Jio is also rolling out 4G data at aggressive prices, undercutting competition in a bid to attract a larger subscriber base.

“We wonder if the incumbents should seriously consider shutting down their 2G and 3G networks ahead of their current plans,” the note said. “The ultra-expensive 900 MHz spectrum that the incumbents are using for 2G in several circles would fail the impairment test as 2G spectrum, in our view. This move would, of course, need the incumbents to roll out VoLTE (Voice Over LTE) on a war footing. Even if they don’t, we wonder if there is an economic case to keep the 2G networks running if the JioPhone sees even modest success. The MTR cut has anyway killed the incoming ARPU leg of the 2G network economics.”

This is not the first time that analysts have flagged off the spectre of price wars on the earnings of India’s telecom operators. In a note dated 24 January, equities brokerage firm Nomura said it was putting estimates of Bharti Airtel’s earnings under review, saying the firm’s ARPUs (average revenue per user) is already slipping back to levels seen before October 2017, before the industry took a round of price hikes. Airtel’s new data packs lower the company’s ARPU by nearly 29%, as per Nomura’s note. “Subpar 3QFY18 financials/metrics of the India mobile business and the mobile tariff revisions in January pose a risk to our forecast earnings for Bharti,” the note said.

“BHIN (Bharti Infratel Limited) 3QFY18 is expected to be weak with tenancy losses from Rcom’s wireless business exit and shutdown of operations by Aircel in six circles,” equities brokerage firm HDFC Securities said in a note dated 8 Jan. “Further, as Voda-Idea merge their operations, their overlapping tenancies would get accounted as loading (6-8% rental/tenant) instead of separate tenancies. A potential reduction of 60-65k tenancies is likely from the merged entities. These could impact BHIN’s EBITDA (Earnings before interest, tax, depreciation, amortization) by ~15% and EPS (earnings per share) by 25%,” it said.

“We expect EBITDA to decline further and likely bottom-out in 4Q (quarter ending March 2018),” said equities brokerage firm JM Financial in a note dated 24 January. “We anticipate a 7-8% cut in our FY18 EBITDA forecast, and expect Idea stock to remain range-bound, because of renewed aggression by Jio (and Bharti). The promoters (AB Group, Voda Plc) may need to ‘signal’ greater commitment in our view, to pre-empt Jio/Bharti from pushing the industry into a war of attrition,” the note said.